Markets move in cycles. Understanding where you are in the cycle helps you choose appropriate strategies and manage risk effectively. The legendary trader Richard Wyckoff identified four distinct phases that repeat throughout market history.
The Four Market Cycle Stages
Every market cycle consists of four stages: accumulation, markup, distribution, and markdown. These phases occur at every timeframe, from intraday charts to multi-year cycles.
Key concept: Markets do not move in straight lines. They cycle between periods of buying and selling, expansion and contraction. Recognizing these patterns helps you trade with the trend rather than against it.
Stage 1: Accumulation
The accumulation phase occurs after a significant decline when prices have bottomed. Smart money (institutional investors) begins quietly buying shares while the public remains bearish.
Characteristics of Accumulation
- Price trades in a sideways range after a decline
- Volume may spike on up days as institutions buy
- Sentiment is negative; news is pessimistic
- Multiple tests of support that hold
- Volatility typically decreases over time
Trading During Accumulation
- Begin building positions on support tests
- Keep position sizes small until breakout confirmation
- Watch for higher lows forming
- Be patient - this phase can last months or years
Accumulation Example: 2009 Market Bottom
- S&P 500 bottomed March 2009 at 666
- March-July 2009: Sideways consolidation (accumulation)
- Sentiment: Extreme fear, recession concerns
- Smart money was buying while public sold
- Breakout above July highs confirmed new bull market
Stage 2: Markup (Bull Market)
The markup phase is the bull market - a sustained uptrend where prices rise steadily. This is when most money is made and public participation increases.
Characteristics of Markup
- Price makes higher highs and higher lows
- Moving averages slope upward and provide support
- Pullbacks are shallow and short-lived
- Volume tends to expand on rallies
- Sentiment improves; news becomes positive
- Public begins participating
Trading During Markup
- Stay long and ride the trend
- Buy dips to rising moving averages
- Avoid fighting the trend with shorts
- Let winners run with trailing stops
- Add to winning positions on pullbacks
Stage 3: Distribution
The distribution phase occurs at market tops. Smart money sells their accumulated shares to eager public buyers. Prices trade sideways to slightly down as selling pressure meets buying enthusiasm.
Characteristics of Distribution
- Price trades in a sideways range after a rally
- Multiple attempts to break higher fail
- Volume increases on down days
- Sentiment is euphoric; news is extremely positive
- Breadth divergences appear (see our breadth article)
- Volatility often increases
Trading During Distribution
- Begin reducing long exposure
- Tighten stop losses on remaining positions
- Avoid adding new long positions
- Consider hedging with puts
- Watch for breakdown below support
Distribution Example: 2021 Market Top
- S&P 500 peaked November 2021
- October-January: Multiple failed breakout attempts
- Sentiment: Extreme greed, meme stock mania
- Breadth diverged: Fewer stocks making new highs
- Breakdown in January 2022 confirmed distribution
Stage 4: Markdown (Bear Market)
The markdown phase is the bear market - a sustained downtrend where prices fall. Fear dominates and selling accelerates as losses mount.
Characteristics of Markdown
- Price makes lower highs and lower lows
- Moving averages slope downward and act as resistance
- Rallies are sharp but fail quickly
- Volume increases on selloffs
- Sentiment deteriorates; news is negative
- Public capitulates and sells
Trading During Markdown
- Stay defensive or in cash
- Consider short positions or inverse ETFs
- Sell rallies rather than buying dips
- Focus on capital preservation
- Watch for signs of accumulation beginning
Bear market rallies: Some of the strongest rallies occur within bear markets. These sharp bounces trap buyers before the downtrend resumes. Be cautious of buying strength during markdown phases.
Identifying Current Market Stage
Use these tools to determine which stage the market is in:
Technical Indicators
- 50/200-day MA: Above both = markup, below both = markdown
- Higher highs/lows: Indicates markup phase
- Lower highs/lows: Indicates markdown phase
- Sideways action: Either accumulation or distribution
Volume Analysis
- Rising prices + rising volume: Healthy markup
- Rising prices + falling volume: Weakening, possible distribution
- Falling prices + rising volume: Markdown in progress
- Falling prices + falling volume: Selling exhaustion, possible accumulation
Sentiment Indicators
- Extreme fear: Often marks accumulation zones
- Extreme greed: Often marks distribution zones
- Improving sentiment: Markup underway
- Deteriorating sentiment: Markdown underway
Stage Identification Checklist
| Stage | Price | Sentiment | Strategy |
|---|---|---|---|
| Accumulation | Sideways at lows | Fear/pessimism | Begin buying |
| Markup | Uptrend | Optimism | Stay long |
| Distribution | Sideways at highs | Euphoria | Begin selling |
| Markdown | Downtrend | Fear/panic | Stay defensive |
Common Mistakes in Cycle Analysis
- Calling tops/bottoms too early: Stages can last longer than expected
- Fighting the trend: Trying to short during markup or buy during markdown
- Ignoring transitions: The sideways phases (accumulation/distribution) are crucial
- Over-trading during sideways: Choppy markets in transition phases whipsaw traders
- Emotional decisions: Selling in fear during accumulation, buying in greed during distribution
Track Your Performance Across Market Cycles
Pro Trader Dashboard helps you analyze how your trading performs in different market environments. See which strategies work best in each cycle stage.
Summary
Markets cycle through four stages: accumulation (buying opportunity), markup (bull market), distribution (selling opportunity), and markdown (bear market). Identifying which stage you are in helps you choose appropriate strategies. Buy during accumulation, hold during markup, sell during distribution, and preserve capital during markdown. Use price trends, volume, and sentiment to determine the current stage.
Want to learn more? Read about market breadth divergences or explore market regime identification.